Financial and
Managerial Accounting
WEEKS NINE AND TEN
Readings
http://www.cliffsnotes.com/moresubjects/accounting/accounting-principlesii/traditional-cost-systems/job-order-cost-system
http://www.wyzant.com/resources/lessons/accounti
ng/job-costing
http://www.accounting4management.com/product_
costs_and_period_costs.htm
Managerial Accounting
Managerial accounting (sometimes called “cost
accounting”) is the process of analyzing company
expenditures and classifying these expenditures as
product or period costs (this lecture), as fixed or
variable costs (later lecture), and as relevant or
irrelevant (later lecture) for internal decision making
purposes.
Job Order Costing
A “job” is one project, such as a house, an
automobile, or a plane
To understand our profit on the sale of the job, we
need to understand the costs associated with the job.
Manufacturing Inventory
When we manufacture any product, we have three
types of costs:
Direct materials – charged directly to each job
Direct labor – charged directly to each job
Manufacturing overhead – allocated to each job
Direct Materials
Calculate the cost of all materials for a job using
units and cost per unit.
Item
a-231
r-226
Total
Cost Quantity
$4.50
350
$12.40
35
Total Cost
$1,575
$434
$2,009
Direct Labor
Calculate the cost of all labor for a job using hours
and wage.
Employee
W.R.
S. P.
Total
Wage
$11.50
$18.50
Hours
20
46
66
Total Cost
$230
$851
$1,081
Manufacturing Overhead
Overhead costs are the costs a company incurs
which relate to multiple projects, such as factory
rent, electricity, depreciation, inexpensive materials
(called “indirect materials”), and factory managers
and janitors (called “indirect labor”)
Overhead Cost Application
Overhead costs applied based on two estimates:
Estimated total overhead costs
Estimated total production
The overhead application rate is calculated as:
Estimated total overhead cost
Estimated total labor hours
Overhead Application Estimates
“Estimated total overhead cost” includes all of the
planned manufacturing overhead costs for the year
“Estimated direct labor hours” is the estimate of the
labor a company needs to complete planned annual
production.
We apply overhead based on the relationship
between these two numbers.
Overhead Application Rate Inputs
Estimated overhead costs:
Rent:
Factory supervisor salary:
Electricity:
Indirect materials:
Indirect labor:
$50,000
$30,000
$10,000
$3,000
$27,000
Estimated labor hours: 3,800
Overhead Application Rate Calculation
Estimated total overhead: $120,000
Estimated total labor hours: 3,800
Estimated total overhead cost
Estimated total labor hours
$120,000
= $31.58 per labor hour
3,800
For each labor hour, we apply $31.58 of overhead
Overhead Application
Direct labor hours (slide 7): 66
Overhead application rate (slide 12): $31.58
66 * $31.58 =$2,084
Total Job Cost
Direct materials (slide 6): $2,009
Direct labor (slide 7): $1,081
Manufacturing overhead (slide 13): $2,084
Total job cost = $5,174
Inventory vs. Expense
When a company spends money on direct materials,
direct labor, or manufacturing overhead, they are
creating “Inventory” which is the product the
company sells. Inventory is an asset. Once the
company sells inventory, they record “Cost of goods
sold”, which is an expense.
Inventory Value Calculation
On 1 May, K Company purchases $2,000 of direct
materials: inventory increases by $2,000
On 15 May, K Company incurs direct labor costs of $3,200
for 300 hours of labor: inventory increases by $3,200
On 15 May, K Company applies overhead at a rate of
$6.00 per labor hour: inventory increases by $1,800 (300
hours * $6.00 overhead rate)
Total inventory increase: $7,000
Gross Profit Calculation
On 1 June, the company sells $5,000 of inventory for a
price of $12,000, and the inventory becomes “Cost of
goods sold” on the income statement.
The difference between sales price and cost of goods sold
is called “gross profit”.
Gross profit: $12,000 - $5,000 = $7,000
Of the total inventory of $7,000, we have sold $5,000 and
we have an inventory balance of $2,000.
Income statement example
Income Statement
Sales
Cost of goods sold
Gross profit
Selling, general, and administrative costs
Advertising expense
Salaries expense
Rent expense
Depreciation expense
Total SGA expense
Interest expense
Income tax expense
Net income
$
$
$
100,000
60,000
40,000
$
$
$
$
$
$
$
$
5,000
4,000
2,000
1,000
12,000
2,800
5,500
19,700
Product Costs vs. Period Costs
Cost of goods sold is a “product cost”; it is the cost
of the product a company sells.
Any costs besides direct materials, direct labor, and
manufacturing overhead are considered “period
costs” and appear as other expenses on the income
statement.
Product Costs vs. Period Costs
Overhead costs (slide 11) and period costs (slide 18)
look very similar; salaries, rent, and depreciation are
in both categories. What is the difference? The
overhead costs relate to manufacturing a product,
and the period costs relate to company management
and marketing. In other words, activities in the
factory are manufacturing overhead, while activities
outside of the factory are period costs.
Exercise
Identify manufacturing overhead costs
Calculate manufacturing overhead rate
Calculate inventory value
Calculate cost per unit of inventory
Prepare income statement
Calculate ending inventory (dollars and units)
Exercise
Direct materials
Direct labor
Indirect labor
Indirect materials
Electricity at factory
Rent at factory
Factory manager
Advertising expense
Rent at headquarters
CEO salary
$
$
$
$
$
$
$
$
$
$
4,500
6,000
400
150
650
1,200
3,000
2,800
1,600
5,000
Direct estimated labor hours
Direct labor hours incurred
Units produced
Units sold
Unit sales price
$
500
300
80
60
340
NOTE: Any manufacturing overhead
amounts are estimates for the year; the
other amounts are actual results for the
accounting period.
Identify Manufacturing Overhead Costs
Indirect labor
Indirect materials
Electricity at factory
Rent at factory
Factory manager
Total
$
$
$
$
$
$
400
150
650
1,200
3,000
5,400
These overhead costs are estimates which we will use to
calculate the overhead rate.
Calculate Manufacturing Overhead Rate
Total MOH costs
Total estimated labor hours
Overhead rate
$
$
5,400
500
10.80
Based on our estimates of overhead costs and labor
hours during the entire year, we will use this overhead
rate to apply overhead costs to each project.
Calculate Inventory Value
Direct materials
Direct labor
Manufacturing overhead
Overhead rate
$ 10.80
Labor hours
300
Total inventory value
$
$
4,500
6,000
$
$
3,240
13,740
The total of our material and labor expenses with the
overhead application is total inventory value.
Calculate Cost Per Unit of Inventory
Total inventory value
Units produced
Cost per unit
$
$
13,740
80
171.75
We calculate the value of one unit of inventory so that
we can later calculate cost of good sold based on units
sold.
Prepare Income Statement
Income Statement
Sales
COGS
Gross profit
SGA Expense
Advertising expense
Rent at headquarters
CEO salary
Total SGA
Net income
$
$
$
20,400
10,305
10,095
$
$
$
$
$
2,800
1,600
5,000
9,400
695
(units sold x unit sales price)
(units sold x cost per unit)
Cost of goods sold is for units sold, not for units produced.
SGA expenses are period costs, not product costs.
Ending Inventory
Inventory produced
Cost of goods sold
Ending Inventory
Dollars
$ 13,740
$ 10,305
$ 3,435
Units
80
60
20
Of all units produces, we sold some (Cost of goods sold, an
expense on the income statement) and we kept some (Inventory,
an asset on the balance sheet).